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##### Question 1. Answer the problem #9-8 on pages 347-...

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Question 1. Answer the problem #9-8 on pages 347-348 of the TM textbook. TERMINAL VALUE REFERS TO THE VALUATION ATTACHED TO THE END OF THE PLANNING PERIOD AND THAT CAPTURES THE VALUE OF ALL SUBSEQUENT CASH FLOWS. ESTIMATE THE VALUE TODAY FOR EACH OF THE FOLLOWING SETS OF FUTURE CASH FLOW FORECASTS : YEAR CASH FOWS 1 1,200,000 2 1,260,000 3 4 5 1,323,000 1,389,150 1,458,608 A. CLAYMORE MINING COMPANY ANTICIPATES THAT IT WILL EARN FIRM FREE CASH FLOWS FCFs OF 4 MILLION PER YEARS FOR EACH OF THE NEXT FIVE YEARS. MOREOVER, BEGINING IN YEAR 6, THE FIRM WILL EARN FCF OF 5 MILLION PER YEAR FOR THE INDEFINITE FUTURE. IF CLAYMORE?S COST OF CAPITAL IS 10%, WHAT IS THE VALUE OF THE FIRM?S FUTURE CASH FLOWS ? B. SHAMELESS COMMERCE INC. HAS NO OUTSTANDING DEBT AND IS BEING EVALUATED AS A POSSIBLE ACQUISITION. SHAMELESS?S FCFs FOR THE NEXT YEARS ARE PROJECTED TO BE 1 MILLION PER YEAR, AND, BEGINNING IN YEAR 6, THE CASH FLOWS ARE EXPECTED TO BEGIN GROWING AT THE ANTICIPATED RATE OF INFLATION WHICH IS CURRENTLY 3% PER ANNUM. IF THE COST OF CAPITAL FOR SHAMELESS IS 10%, WHAT IS YOUR ESTIMATE OF THE PRESENT VALUE OF THE FCFs ? C. DUSTIN ELECTRIC INC. IS ABOUT TO BE ACQUIRED BY THE FIRM?S MANAGEMENT FROM THE FIRM?S FOUNDER FOR 15 MILLION IN CASH. THE PURCHASE PRICE WILL BE FINANCED WITH 10 MILLIOM IN NOTES THAT ARE TO BE REPAID IN 2 MILLION INCREMENTS OVER THE NEXT FIVE YEARS. AT THE END OF THIS FIVE YEAR PERIOD. THE FIRM WILL HAVE NO REMAINING DEBT. THE FCFS ARE EXPECTED TO BE 3 MILLION A YEAR FOR THE NEXT FIVE YEARS. BEGINING IN YEAR 6, THE FCFS ARE EXPECTED TO GROW AT A RATE FO 2% PER YEAR INTO THE INDEFINITE FUTURE. IF THE UNLEVERED COST OF EQUITY FOR DUSTIN IS APPROXIMATELY 15% AND THE FIRM?S BORROWING RATE ON THE BUYOUT DEBT IS 10% (BEFORE TAXES AT A RATE OF 10%), WHAT IS YOUR ESTIATE OF THE VALUE OF THE FIRM ? Question 2. Answer the problem #10-8 on pages 390-391 of the TM textbook. In 2008, Dub Tarun founded a firm using $200,000 of his own money, $200,000 I senior (bank) debt, and an additional $100,000 in subordinated debt borrowed from a family friend. The senior debt pays 10% interest, while the sub debt pays 12% interest and is convertible into 10% of the firm?s equity ownership at the option of the investor, J Martin Capital. Both debt issues have 10-year maturities. In March 2009, the firm?s financial structure appeared as follows: DUB TARUN INC., MARCH 2009 ACCOUNTS PAYABLE $100,000 SHORT-TERM NOTES 150,000 TOTAL SHORT-TERM DEBT 250,000 SENIOR DEBT (10% INTEREST RATE) 200,000 SUB DEBT (12% INTEREST RATE, CONVERTIBLE INTO 10% STOCK) 100,000 EQUITY (DUB TARUN) 200,000 TOTAL DEBT AND EQUITY 750,000 Dub has determined that he needs an additional $250,000 if he is going to continue to grow his business. To raise the necessary funds, he intends to use an 8% convertible preferred stock issue. Dub projects that the firm?s EBITDA (earnings before interest, taxes, depreciation, and amortization) in five years will be 650,000. Although Dub isn?t interested in selling his firm, his banker recently told him that businesses like his typically sell for five to seven times their EBITDA. Moreover, by March 2014, Dub expects that the firm will have 300,000 in cash and that the firm?s pro forma debt and equity will be as follows: DUB TARUN INC. PRO FORMA FINANCIAL STRUCTURE, MARCH 2014 ACCOUNTS PAYABLE 200,000 SHORT-TERM NOTES 250,000 TOTAL SHORT-TERM DEBT 450,000 SENIOR DEBT (10%) 400,000 SEB DEBT (12%, CONVERTIBLE INTO 10% OF THE FIRM?S STOCK) 100,000 EQUITY (DUB TARUN) 800,000 ADDITIONAL FINANCING NEEDED 250,000 TOTAL DEBT AND EQUITY 2,000,000 A. What would you estimate the enterprise value of Dub Tarun Inc. to be on March 2014? (HINT: ENTERPRISE VALUE IS TYPICALLY ESTIMATED FOR PRIVATE COMPANIES USING A MULTIPLE OF EBITDA PLUS THE FIRMS CASH BALANCE.) IF THE SUB DEBT CONVERTS TO COMMON IN 2014, WHAT IS YOUR ESTMATE OF THE VALUE OF THE EQUITY OF DUB TARUN IN 2014? B. IF THE ESTIMATED ENTERPRISE VALUE OF THE FIRM EQUALS YOUR ESTIMATE IN QUESTIONS A, WHAT RATE OF RETURN DOES THE SUB DEBT HOLDER REALIZE IF HE CONVERTS IN 2014? WOULD YOU EXPECT THE SUB DEBT HOLDER TO CONVERT TO COMMON STOCK? C. IF THE NEW INVESTOR WERE TO REQUIRE A 45% RATE OF RETURN ON HIS 250,000 PURCHASE OF CONVERTIBLE PREFERRED STOCK, WHAT SHARE OF THE COMPANY WOULD HE NNED, BASED ON YOUR ESTIMATE OF THE VALUE OF THE FIRM?S EQUITY IN 2014, WHAT IS YOUR ESTIMATE OF THE OWNERSHIP DISTRIBUTION OF DUB TARUN?S EQUITY IN 2014, ASSUMING THAT THE NEW INVESTOR GETS WHAT HE REQUIRES (TO EARN HIS 45% REQUIRED RATE OF RETURN) AND THE SUB DEBT HOLDER CONVERTS TO CMMON? WHAT RATES OF RETURN DO EACH OF THE EQUITY HOLDERS IN THE FIRM EXPECT TO REALIZE BY 2014, BASED ON YOUR ESTIMATE OF EQUITY VALUE? DOES THE PLAN SEEM REASONABLE FORM THE PRESPECTIVE OF EAH OF THE INVESTORS? D. WHAT WOULD BE DUB TARUN?S EXPECTD RATE OF RETURN IF THE EBITDA MULTIPLE WERE FIVE OR SEVEN? E. WHAT WAS THE POST-INVESTMENT AND PRE-INVESTMENT VALUE OF DUB TARUN?S EQUITY IN 2009, BASED ON THE INVESTMENT OF THE NEW INVESTOR? Question 3. Answer the problem #12-7 on pages 478 of the TM textbook. Conceptual analysis of real options: Highland properties owns two adjacent four-unit apartment buildings that are both on 20,000 square feet of land near downtown Portland, Oregon. One of the properties is in very good condition, and the apartments can be rented or $2,000 per month. The units in the other property require some refurbishing and in their current condition can be rented for only about $1,500 per month. Recent zoning changes, combined with changes in market demand, suggest that both lots can be redeveloped. If they are redeveloped, the existing units would be torn down and new luxury apartment buildings would be built on the site, each with 10 apartment units. The cost of the 10-unit buildings is estimated to be about $1.5 million, and each of the 10-apartment unit can be rented for 2,500 per month under current market conditions. Similar properties that have been refurbished are selling for 10 times their annual rentals. a. Identify the real option(s) in this example. b. What are the basic elements of the option(s) (i.e., the underlying asset on which the option is based, the expiration date, and the exercise price)? c. Estimate the value of the option to develop the property. (Hint: make any assumptions you must to arrive at an estimate.),HELLO THERE, PLEAE LET ME KNOW IF YOU ARE WILLING TO WORK ON THIS ASSIGNEMNT BECAUSE I HAVE SO LIMITED TIME LEFT PLEASE PLEASE LET ME KNOW EITHER WAY

Paper#11971 | Written in 18-Jul-2015

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